If you are interested in pursuing an SBA business loan, such as a 7(a) or another type of SBA loan, you will need to provide proof of hazard insurance. In this article, we briefly discuss the main types of SBA loans, what exactly hazard insurance is, what it covers, how to get it, and other insurance types you should consider.
What is an SBA Loan?
A Small Business Administration (SBA) loan is a small business loan that is backed by the SBA, up to 80%. In some cases, such as the EIDL program, it is directly through the SBA. Here are the most common types of SBA loans:
- EIDL loan. The current SBA Economic Injury Disaster Loan (EIDL) program, which closed for new applications in December of 2021, offers loans up to $2M at 3.75% interest (2.75% for non-profits) with a 30-year term.
- SBA 7(a) loan program. The 7(a) program is the SBA's most common loan type and it's offered through SBA-approved lenders. The maximum loan that businesses can qualify for is $5M. The SBA will back 85% of your loan up to $150K and will back 75% of your loan over $150K.
- SBA 504 loan. 504 loans are offered through SBA non-profit partners, called Certified Development Companies (CDCs). 40% of the loan will be financed through the CDC (which is backed by the SBA), 50% will be financed by another lending institution, and 10% must be covered by the borrower in cash or business equity. The business must create one job for every $65K borrowed.
- SBA Microloans. For microloans (up to $50K) the SBA provides funding to financial intermediaries, such as Community Development Financial Institutions (CDFIs), and other nonprofit community-based organizations. These intermediaries then offer microloans to businesses.
Do SBA Loans Require Hazard Insurance?
Yes, when you apply for an SBA loan, you will be required to provide proof of hazard insurance. The SBA, like all other lenders, wants proof that your business and business assets are protected. In some cases, you may have up to 12 months to acquire hazard insurance, but many lenders that partner with the SBA will want to see proof of insurance upfront.
What is Hazard Insurance?
Business hazard insurance is insurance that covers physical damage to your business or assets in the event of a "hazard." Ironically, there is no such thing as "hazard insurance," at least by name. It's a term for the type of coverage the SBA requires you to have. Here are some common examples of hazards that can be covered by hazard insurance:
- Theft. When somebody steals business assets from your property, hazard insurance can cover the cost of replacing them.
- Vandalism. If your business property is vandalized, your hazard insurance will cover the cost to clean, repair, or replace the vandalized items.
- Fire damage. Hazard insurance will cover the cost of replacing or repairing property damaged by fire. This may or may not come standard, so ask about this coverage.
- Water damage. Generally, most policies will cover accidental water damage — like a burst pipe, water heater leak, overflowing sink, washing machine failure, etc.
- Storm damage. Depending on the fine print in your policy, your coverage may also include damages from natural disasters like floods, hurricanes, lightning storms, and earthquakes. Every policy is different so be sure you know what yours covers and what it doesn't.
What Insurance is Needed for SBA loans?
Since there is no specific "hazard insurance," all prospective borrowers need some form of Commercial Property Insurance to safeguard their business assets, but there are some specific types of insurance you may need as well:
- Flood insurance. If your business is located in a flood hazard area, you need insurance that covers flood damage or a special addition — called a riser — to an existing policy that covers flood damage.
- Real estate insurance. If the collateral for your SBA loan is another piece of real estate — commercial or private — you need to be certain that piece of real estate is insured.
- Life insurance. Under some circumstances — especially for sole proprietors or single-member LLCs — the SBA may require life insurance or Key Person Insurance.
Do You Already Have Hazard Insurance?
As a business owner, you may already have hazard insurance and not even know it. Two common insurance policies that protect against hazards are Commercial Property Insurance and a Business Owner's Policy.
Commercial Property Insurance typically covers the building and the contents of the building from accidental damage and vandalism. It covers the cost to repair or replace the building and the assets inside — up to the policy limit.
A Business Owner's Policy (BOP) is a hybrid policy that combines Commercial Property insurance and General Liability Insurance into one policy. A BOP will cover property damages just like Commercial Property, but it also protects against lawsuits that stem from bodily injury and other liabilities.
If you run a home-based business, your homeowner's insurance may or may not be sufficient to cover your business assets. Speak with your homeowner's insurance provider or an insurance agent to determine if you need additional hazard coverage. Your SBA lender or loan officer will be able to help you as well.
How Much Hazard Insurance Coverage Do You Need?
The exact requirements for each SBA loan will vary, as some lenders may have their own stipulations as well, but the SBA requires 80% coverage. That being said, it's best practice to insure 100% of the value of your business assets.
Let's say that your business owns its building. The value of it — and all the assets inside — is $5 million. Let's also say that your Commercial Property Insurance maxes out at $4 million. If something were to happen that destroys the entire building and everything inside — a fire for example — then you're out that $1M.
Speaking with an insurance provider can help you determine the amount of coverage you need to cover 100% of your assets. This ensures that you will be able to replace everything if the worst-case scenario should happen.
Where Do You Get Hazard Insurance?
If you do not currently have business insurance, there are numerous options out there for you. Before purchasing, consider your business industry, business assets, and potential risk when choosing insurance. It's best practice to speak with an insurance broker before purchasing a policy.
If you are ready to purchase business insurance, we recommend Next Insurance for almost every type of business insurance. Next Insurance provides affordable quotes that are tailored to your business, starting at just $25 per month. Use our partner link to get a free quote.
What Other Types of Insurance Should You Consider?
Hazard insurance protects your business from physical damages, but there may be other types of insurance you need — depending on your business. Below are three other common types of business insurance, but we have an ultimate guide to business insurance that explains the top 13 types of business insurance.
- General Liability Insurance. General liability Insurance protects you and your business should someone—a client, customer, vendor, etc.–sustain an injury on your business property, or from using your products and services.
- Workers' Compensation Insurance. Workers' Compensation Insurance covers the medical costs and lost wages when employees are injured on the job or get sick from performing their jobs. Nearly every business that has employees needs Workers' Comp.
- Professional Liability Insurance. Professional Liability Insurance (also called Errors and Omissions Insurance or E&O) protects you from claims of negligence or substandard work, and any subsequent financial loss, by covering the cost of lawsuits or legal action.
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